Mumias bailout is just the first step in radical reforms to save sugar firm
What you need to know:
- First, if we allow the bailout plan to be politicised, and end up in a situation where the government and the lenders are pulling in different directions, it will not work.
- The second observation I wish to make is that the bailout plan will not succeed without a concerted effort on the part of the government and lenders to dismantle the stranglehold a small group of distributors has had in the sales and distribution department of the company.
- Thirdly, for the bailout to succeed, the company must work to restore its relationship with the farmer.
I fully support the government’s decision to bail out the troubled Mumias Sugar Company. After all, the government is the single largest shareholder of the company.
Were it to be left to collapse, the impact on the macroeconomy of western Kenya would be disastrous.
This is no time for preaching pro-market rhetoric and laissez faire capitalism.
Sugar farming must continue to be a key livelihood option for the citizens there.
Indeed, government bailouts of big companies have become commonplace, especially since the global financial crisis.
I’m glad that the intervention by the government in the company is informed by thorough analytical work, audits and diagnosis of the problems.
Last year, a fairly comprehensive forensic audit was conducted on its operations and processes.
The audit firm, KPMG — at the instigation of the company’s lenders — has recently concluded a thorough business review of the company.
The lenders wanted a business review of the company to determine whether there was a viable business case for restructuring the company’s debts. Thus, there is a wealth of data and information on the company.
I have gone through some of the reports and come to the following conclusions:
POLITICISED
First, if we allow the bailout plan to be politicised, and end up in a situation where the government and the lenders are pulling in different directions, it will not work.
This is exactly why the Pan Paper government bailout plan collapsed. Co-operation with lenders is going to be absolutely critical.
This is a pertinent issue because the lenders want to see radical changes.
For instance, they have demanded a total overhaul not only of the top management, but also of the whole board.
As a first step, the company was last week forced to advertise all the top management positions. This has sparked intense lobbying by individuals who want to protect their jobs.
Clearly, getting rid of the whole board is even going to be more politically difficult.
Yet the lenders are convinced that pumping money into the company without thoroughly shaking it up amounts to throwing good money after bad money.
This is how the lenders put it in one of the reports: “Lenders need to see a clear break with the past in order for them to have any confidence in any turnaround plan.”
The second observation I wish to make is that the bailout plan will not succeed without a concerted effort on the part of the government and lenders to dismantle the stranglehold a small group of distributors has had in the sales and distribution department of the company.
Such has been the capture of the company that at one stage, about 70 per cent of the total revenue came from 10 top customers.
And 65 per cent of sugar sales were conducted by six customers.
Talk of risk concentration. Clearly, the balance of power was firmly in the hands of this tiny elite.
Discounts were issued arbitrarily. The quiet joke within Mumias is that anyone working in marketing, sales and distribution instantly became a millionaire.
FARMER
Thirdly, for the bailout to succeed, the company must work to restore its relationship with the farmer.
The biggest irony in the Mumias saga is that instead of the cane farmer making the money, it is the distributors and their political allies who have been reaping the billions.
The sugar farmer in the Mumias zone has been subjected to many forms of exploitation.
I still remember what happened during the IPO, when the government decided to reserve 30 per cent of the company to farmers.
Farmers responded in a big way, believing that this was an opportunity to diversify their sources of income.
A few months later, the price of the stock collapsed way below the issue price.
The stage was set for an invasion of Western Province by representatives of Nairobi-based stockbroking houses who travelled to Mumias Town in large numbers to mop up shares from the unsophisticated investors on the cheap. The experiment did not work.
Sugar farming in Mumias must be made profitable for the farmer, again.
